It’s all about earnings

This week’s chart reminded me of my second-year economics class at the University of Calgary approximately 25 years ago where the professor was lecturing on short versus long run economic impacts. His quote was, “in the short run, anything can happen and, in the long run, we’re all dead”.  At the time, I wasn’t sure if this was an attempt at humor or him trying to get the class’s attention. Later, I discovered his lecture was loosely based on a famous quote from the economist John Maynard Keynes, “the long run is a misleading guide to current affairs. In the long run, we are all dead”.

Shifting from economics to stock market performance, almost any result can occur over the short term, however, longer term market performance is primarily driven by the direction of earnings. Stock markets like the S&P 500 and the S&P TSX are a market of stocks. This means their performance is based on the performance of individual stocks included in that index. The S&P 500, for example, is comprised of 500 of the largest publicly traded companies in the U.S. and, because it is a market capitalization-weighted index, the largest companies like Apple, Google, Microsoft, Nvidia, etc. have a significant impact on the performance of the overall index. A recent example of why it’s important to have a longer-term perspective when it comes to investing in stocks is the sell-off experienced this past April due to the Trump Administration’s implementation of tariffs beyond what the market was expecting. The market sell-off proved to be short-lived because tariffs were relaxed and, more importantly, because tariffs haven’t changed the direction of earnings growth.